It Was Not A Good Week For The Patent Box

March 14, 2016

Last week, criticism of the patent box came from both Europe and the United States.

A patent box, or “innovation box,” is a tax policy that provides a lower tax rate on income related to intellectual property. The stated goal of a patent box is to promote research and development, encourage companies to locate intellectual property in the country with the incentive, and to make a country's tax code more internationally competitive. Several countries throughout the world have patent boxes. It has gained popularity in recent years as a way for countries to attract corporate activity. Recently, it has become an issue in the U.S. due to the OECD’s work on BEPS.

First, On Thursday, speaking in Ireland, the head of the OECD Pascal Saint-Amans cautioned against the use of patent boxes. He said that a patent box is not a good way to foster the creation of intellectual property and reiterated the OECD’s position on the policy:

“What we have said is that if you decide to have a policy that may not be smart but that is your sovereignty then do it in a proper manner that will not take the tax base from your partners in an unfair manner.”

The next day, Jason Furman, the Chairman of the Council of Economic Advisors, while speaking on innovation at Georgetown University, criticized the patent box:

“Moving to an innovation box would entail joining in a race to the bottom that is not justified by the economics of an innovation box and certainly not justified when an alternative, proven, effective method exists to encourage greater investment in innovation.”

The bulk of Furman’s speech compared the patent box to the R&D tax credit. He argued that if policymakers wanted to encourage innovation in the United States, both economic theory and research show that an upfront subsidy such as the R&D tax credit is preferred over a patent box. He also said that the patent box could be more administratively challenging than the R&D credit because it may be difficult to properly define IP income.

We voiced similar concerns back in July 2015 when Representatives Charles Boustany (R-LA) and Richard Neal (D-MA) released their “innovation box” or patent box discussion draft. We said it would be better to address concerns about competitiveness and BEPS by simply lowering our high corporate tax rate and moving to a territorial tax system. This would reduce the incentive to locate activity overseas without introducing new administrative challenges. And if we do want to subsidize R&D, expanding the credit would be easier since it already a part of the tax code.

The timing of these comments from the White House and the OECD is somewhat unfortunate for the Way and Means Committee. The committee is currently working on an international tax reform draft that is due to be released soon. The draft will likely contain a modified version of the Boustany-Neal patent box.

Read more about the patent box.

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